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You know what? Supply chain management is playing three-dimensional chess blindfolded at times. Just when you think you’ve got it all figured out: your suppliers are reliable, your logistics humming along, inventory levels look perfect–something goes wrong. Container ship stuck sideways in canal. The risk of a semiconductor shortage is being felt across all industries. Or something slightly less drastic but equally disruptive: the factory of your key supplier is flooded, the new regulations suddenly change the game.
The point is, risk is not going away. In fact, logistics systems have become more complex, more interconnected and indeed more fragile than ever before. But that doesn’t mean we can do nothing. Not even close. What it means is that we need to get creative about finding space–real, physical space–in our operations for risk mitigation strategies that do work.
The Shadowy Places
Let me paint you a picture. Last year I was speaking to a supply chain director who had been in business for two decades. Very smart guy, knew his stuff. He said that his company had recently been hit hard because their only supplier for a key component halfway around the world went on strike. Three weeks production time, out of the window. The kicker? They’d identified single source dependency as a risk two years earlier but never allocated space in their strategy to deal with it.
Sound familiar?
In fact, most supply chain professionals are aware of where their risks exist. We conduct assessments, develop heat maps and complete risk registers. But knowing and doing? That is where things become complicated. Risk mitigation isn’t just about recognizing threats — it’s about creating real operational breathing room to actually do something about them.
Take a look at your own supply chain for a moment. Where in the world are those pressure points? Maybe it’s just-in-time inventory system that is very well suited until it isn’t. Or maybe it’s the lack of visibility into your second and third tier suppliers. May be your reliance on a single mode or route of transportation. And these are not theoretical risks; these are time-bombs.
Building Resiliency
Now, I can already hear what some of you are thinking: “Sure, risk mitigation sounds great, but have you seen my budget lately?” Fair point. Traditional supply chain risk management often feels like you are being asked to purchase insurance for everything while at the same time trying to reduce your costs. It’s enough to spin the head of anyone.
But that is where things get interesting. So, including more risk mitigation often doesn’t involve an increase in budget. Sometimes it’s a matter of spending the same money differently. Let me explain.
Take inventory management for example. The traditional approach is to reduce inventory to keep down the cost of holding stock. Makes sense on paper. But what if you intelligently raised inventory on just your most critical, most difficult to source components? You’re not talking about filling up warehouses with everything–just selective buffering where it’s most important. One electronics manufacturer I worked for did just that. They defined their top five elements that would put production into shutdown if they were not available and created a strategic reserve. The carrying cost increase? Less than 2% of their total inventory budget. The peace of mind and operating stability? Priceless.
What I call flexible redundancy is another approach that is gaining traction. Instead of having expensive duplicative sources for everything, you establish relationships with back-up sources who can ramp up fast if necessary. Think of it as having a gym membership that you’re not using all that much, but for most of that time it’s just a small monthly fee, but when you need it, it’s there. These suppliers may have a little higher cost per unit, but you are only hiring them during disruption. The math tends to work out much more favorably than you’d expect.
Operational Flexibility
This makes you wonder, what are the real supply chain directors losing sleep over? It’s not the hazards they know about–it’s the ones they haven’t thought up yet. Five years ago, who would have put “global pandemic shuts down manufacturing worldwide” on their risk register? Exactly.
This is why operational flexibility is nice to have, but not essential to survival. But flexibility ultimately requires space–space in your contracts, space in your processes, space in your thinking. Too many supply chains are optimized to brittleness. They are a real beauty in ideal conditions and break at the first movement of stress.
Consider what you have on your supplier contracts. Are they sacred contracts that bind you to certain volumes and periods of time? Or do they have force majeure clauses, flexibility of volumes and alternative fulfillment options? One procurement manager I talked to told me she only started writing ‘flexibility clauses’ into new contracts, such as being able to alter the quantity of an order by 20% with two weeks’ notice, or options to change from one production facility to another. These provisions won’t cost anything to add but can pay off immeasurably in the event of disruption.
The same thing goes for your logistics network. It may be efficient to have one distribution center for everything, but what happens when that center goes down? One common attribute of companies who weathered recent disruptions is that they had designed their distribution networks for flexibility. Multiple smaller facilities, cross-docked capabilities, direct-ship options- these aren’t redundancies, but options. And when plan A goes sideways you need options.
Technology
Put simply, if you’re still using spreadsheets and quarterly reviews to manage supply chain risk, you’re already falling behind. Because of how today’s supply chains are so interconnected, you need real-time visibility and predictive capabilities to stop disruptions from cascading. But–and this is a key point–technology is no magic bullet. It’s a tool that opens up room for greater decision making.
Modern risk management platforms are able to track everything from weather patterns to social media sentiment and flag potential disruptions before they occur. One food distributor installed a system which monitored weather patterns along their major transportation routes. It forecasted a major storm system and they were able to reroute shipments two days early to avoid what would have been a week-long delay. The technology didn’t take the risk away, it left room to react.
But let’s be realistic. Not everyone has the budget to invest in a new high-tech AI-powered risk management platform. The good news? Even simple improvements in visibility can go a long way. Something as simple as demanding that your tier-one suppliers provide you weekly capacity updates will give you the lead time you need to adjust. One manufacturer began a simple practice — every Friday every supplier sends a simple email consisting of 3 facts – current utilization of capacity, any foreseeable disruption, and stock levels of key materials. Low-tech? Sure. Effective? Absolutely.
The Human Element
One thing that might surprise you is that some of the best risk mitigation is done through relationships rather than through processes. I’m talking about the kind of relationships where your supplier rings your phone before there’s a crisis, where logistics providers give you preference in times of capacity crunches, where your team is empowered enough to raise issues without fear of judgement.
Building these relationships takes space too – space in your calendar for frequent connect-ins that aren’t about immediate issues, space in your budget for relationship building activities, space in your culture for open discussion of risk and failure.
I know one supply chain director who holds monthly “coffee calls” with important suppliers–no agenda, just talking. Sounds like a waste of time? Through these calls she has received advance notice of everything from upcoming labor negotiations to new regulations that are on the horizon. That informal intelligence has helped her company avoid several disruptions that caught her competitors off guard.
Internal relations are also important. Creating space for cross-functional risk discussions can identify vulnerabilities you’d never identify from your silo. Warehouse personnel may have an understanding of space limitations that will be critical during peak season. Finance may know of credit risks with certain suppliers. Sales may have gotten hearsay that a big customer wants to change their requirements. When these insights are locked up in departments, they are merely information. When they’re shared and acted upon they are risk mitigation.
Risk Mitigation Plan
Alright, so you’re convinced. Risk management should be included in your supply chain planning. But where do you start? Let’s take a look at a workable setup for a 90-day approach for working with an infant.
Days 1-30: Audit, identify and prioritize. But no, not another long risk assessment that goes on the shelf. I’m referring to a sharp analysis of your five most profitable products or services. Map their supply chains. Point out individual points of failure. Find hidden dependencies. One question that should be asked is: if this supplier/route/facility went away tomorrow, how long before we’re in trouble? If the answer is in days, not weeks, you have discovered your priority.
Next 30 days: Create quick wins. Get the low-hanging fruit – risks you can address without huge investment or re-organizing. Maybe it’s finding alternative suppliers for key components (even though you cannot contract with them yet). Perhaps it’s setting reorder points in order to create small buffers. Can be as easy as writing down tribal knowledge before key people retire. These aren’t the long-term solutions, but they buy time.
Last 30 days: Create your structure. This is where you develop systematic risk mitigation into your operations. Develop monitoring mechanisms–these could be as advanced as a risk dashboard or as simple as a weekly team meeting. Create escalation protocols for problems so they don’t turn into crises. Most importantly, have ownership. Shared responsibility for mitigation of risk becomes a non-responsibility.
Space is Not a Luxury, It’s a Necessity.
Look, I get it. In a world that is focused on lean and reducing costs, creating space seems counter-intuitive. Every one of those square feet of warehouse space costs money. All backup supplier relationships need to be maintained. Each buffer stock represents a capital tie up. But here’s the cold hard truth: The cost of mitigation almost always ends up being lower than the cost of disruption.
One semiconductor company found out that the hard way when they lost $50 million in revenues because they were not able to source their product with a thirty-cent component. One food manufacturer found that saving 2% on transportation costs meant nothing when their single logistics provider failed during peak season causing $10 million in lost sales and immeasurable brand damage.
The companies that are really thriving today – not just getting by – realize that operational resiliency isn’t about anticipating every conceivable risk. It’s about building systems that are flexible enough to deal with the unexpected. They’ve given prominence to risk mitigation not because they have something to offer, but because they can’t afford not to.
Perfect supply chain is not a requirement. It needs to be resilient. And resilience needs space–space to move around when things go wrong, space to adjust when your conditions change, space to bounce back when things go wrong. That space may be strategic buffers of inventory, flexible supply agreements, distributed logistics structures, or just strong relationships of trust and communication with their suppliers.
The question is not whether you can afford to make room for taking risk out of your supply chain. The question is can you afford not to. Because in today’s interconnected, volatile business environment, it’s not a question of if disruption will hit – it’s a question of when. And when it does, the space you’ve created for risk mitigation won’t seem like a waste. It’ll feel like wisdom.
So start small if you need to. Take one critical vulnerability and build some space around it. Build from there. Your future self–the one that has to deal with the next black swan event–will thank you.